BOJ to hold fire until late 2014, may peg yields later - ex-board member

TOKYO Thu Dec 26, 2013 7:11am GMT

Bank of Japan Policy Board member Atsushi Mizuno speaks during an interview with Reuters at the central bank in Tokyo January 25, 2008 file photo. REUTERS/Yuriko Nakao

Bank of Japan Policy Board member Atsushi Mizuno speaks during an interview with Reuters at the central bank in Tokyo January 25, 2008 file photo.

Credit: Reuters/Yuriko Nakao

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TOKYO (Reuters) - The Bank of Japan will likely hold off on expanding its monetary stimulus until at least late next year and may consider adopting a policy that directly targets bond yield levels in the future, a former central bank board member said.

That's because the BOJ already gobbles up 70 percent of new Japanese government bonds issued in the market, and could thus face a shortage of fresh bonds to buy if it tries to maintain its current ultra-loose policy beyond two years, Atsushi Mizuno told Reuters in an interview on Thursday.

Such constraints will discourage the BOJ from expanding its stimulus again and may eventually prompt the central bank to shift to a policy that aims to keep bond yields at a certain level or in a range, instead of buying a set amount of JGBs each month, he said.

"If the BOJ were to try to keep bond yields stable and consider further easing, one idea that may be discussed is to peg long-term interest rates," said Mizuno, who sat at the BOJ board until 2009 and still has close contacts with incumbent central bank policymakers.

"Instead of buying a set amount of JGBs each month, the BOJ could stem any spike in yields by directly intervening in the bond market whenever long-term rates rise above a certain level," said Mizuno, now vice-chairman of fixed income for Asia-Pacific at Credit Suisse.

The BOJ launched an aggressive stimulus programme in April this year, pledging to double base money via asset purchases to support the economy and accelerate inflation to 2 percent in roughly two years.

Markets have been rife with speculation the BOJ may ease again early next year to cushion the pain from a sales tax hike in April 2014, although Governor Haruhiko Kuroda has said the economy can withstand the damage without additional stimulus.

Under its current framework, the BOJ buys about 7 trillion yen (40 billion pounds) in long-term government bonds per month along with risky assets like trust funds investing in stocks and property.

Mizuno said the BOJ would not ease again at least until October next year, when there is enough data on how the tax increase has affected the economy and when the deadline for meeting the BOJ's price target approaches.

"I don't think the BOJ will act any time soon," he said. "The economy is moving in line with its forecast and there's nothing in Kuroda's message that signals his readiness to ease again soon."


Easing again under the current framework will be difficult, although in case the BOJ does so it will mainly increase JGB purchases, said Mizuno, a former bond market strategist.

The BOJ also needs to consider a new policy framework that replaces the current one - dubbed quantitative and qualitative monetary easing (QQE) - after two years due to the technical difficulties of continuing to buy JGBs aggressively, he said.

The BOJ, set to achieve its target of increasing its balance of JGB holdings to 140 trillion yen this year, must expand the balance by another 50 trillion yen by the end of 2014. But market liquidity for JGBs is already drying up due to the BOJ's dominance in the market.

Tighter financial regulations require financial institutions to set aside a certain amount of low-risk, high-liquid assets like JGBs, which means they may run out of bonds to sell to the central bank in exchange for cash, Mizuno said.

"The BOJ knows it cannot go on with the current QQE framework beyond two years, so it must be already discussing internally its next framework," he said.

"Japan is saddled with a huge amount of public debt and achieving its primary balance target appears difficult. In such an environment, one thing the BOJ can do, albeit reluctantly, is to send a clearer message to markets that its focus is to keep long-term rates stable," Mizuno said.

"For example, the BOJ would intervene in the bond market targeting, say, five- or 10-year JGB yields."

Such a policy would become a real option if the BOJ can work closely with the Ministry of Finance, which is in charge of deciding how much in JGBs to issue each year and in what distribution across the yield curve, he said.

(Editing by Chris Gallagher)

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